Investors "Screwed" by Auction-rate Securities

New York, NYIt was as recent as the fall of 2007 when investors were encouraged to place their life savings into auction-rate securities. They were told that such an investment was as safe as cash. However, these investors have now learned that the large institutional investors were selling off their auction-rate securities at the same time the smaller investors were buying in.

Throughout 2007, these same large institutional investors owned approximately 80% of auction-rate securities and only owned 20% by the end of 2007. One gentleman, William Loehman, has felt the brunt of the auction-rate securities situation and believes that the large investors knew something that the individual investors did not know, which explains why they were selling while the small investors were buying.

Loehman has $300,000 of his money tied up in auction-rate securities that were issued by the Missouri Higher Education Loan Authority (MOHELA) and he is unable to retrieve that money. He is currently in a position in which he feels hopeless and feels powerless to do something about it.

Auction-rate securities are supposed to provide investors with a measure of liquidity because the investments, which resemble that of long-term bonds, are bought and sold every seven, 28, and 35 days. Investors were able to receive interest payments on a monthly basis, and have been able to sell them in the past when other individuals and brokerages would step in to buy them as soon as they were for sale.

However, it is the credit crunch that has caused an issue in auction-rate securities and investors such as Loehman are in a situation that prevents them from retrieving their money. Many auction-rate securities were issued by student lending agencies such as MOEHLA all over the United States and the money has been locked up since mid-February.

Recent reports have shown that brokers were telling these investors that their money was safe and encouraged them to buy the securities. At the same time the institutional investors were getting out of these investments. Part of the reason why these smaller investors were convinced that the securities were safe was because firms on Wall Street were under pressure to find new buyers for auction-rate securities. One Florida investor said his son purchased $50,000 in auction-rate securities in November and then decided to invest another $200,000 in December. He claims the brokerage stated the investments were safe and could be accessed the same way as a money market.

Now a task force that is made up of nine states is investigating the claims of investors who claim brokerages convinced them that the investments were safe. There has also been a number of class-action lawsuits filed against brokerages that allegedly made the claims. Those who have invested and are unable to retrieve their money have watched the interest on their investment return take a nosedive and there is nothing they can do about it.

As for Loehman, he is considering a lawsuit against the broker, but is awaiting the results of the investigation before he moves forward.

By: Ginger Gillenwater